Citi Downgrades USD Partners To Neutral, Cites Near-Term Stable, Long-Term Risky

Citi has downgraded USD Partners LP (NYSE: USDP) to Neutral from Buy on valuation, and said the near-term operations are stable, but the long-term looks risky. However, Citi maintains its target price at $10.50.

USD Partners LP is a master limited partnership that acquires, develops and operates energy-related rail terminals and other midstream infrastructure assets and businesses.

Looking Forward

"We view USDP's near-term cash flows as stable and should provide investors adequate distribution coverage with minimal risk. However, in light of continued low crude spreads and additional pipeline capacity coming online over the next few years, we believe signing new shippers to long-term terminalling contracts could prove challenging," analyst Faisel Khan wrote in a note.

The analyst believes continued oil production growth from Western Canada should support a certain level of crude-by-rail demand. Additionally, support cash flows from the Hardisty and Casper terminals are likewise expected — to a certain extent, upon contract expiration. But, Khan noted that it is difficult to predict the levels.

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The Hardisty terminal is contracted through mid-2019 with five investment grade companies including major integrated oil companies, refiners and marketers, while the Casper terminal is contracted primarily with investment grade refiners and is underpinned by contracts with an average lifespan of three years.

"These contracts create cash flow stability at the partnership and provide for strong distribution coverage over the next ~three years," Khan highlighted.

Beyond 2016

The analyst noted that growth at USDP beyond 2016 will be predominantly driven by Canada-originating pipeline capacity and potential dropdown assets from USD Group.

While current pipeline capacity out of Canada remains constrained, providing USDP with near-term opportunities, pipeline flow efficiencies are providing incremental capacity to operators.

"Although we do believe that rail capacity will be an integral long-term part of crude logistics infrastructure due to various reasons (pipeline constraints, non-pipeline accessible destinations, redundancy, destination flexibility), the amount of terminal capacity required is difficult to estimate," Khan added.

At time of writing, USD Partners was down 1.64 percent at $10.80 shortly after Thursday's opening bell.